Hurting Canadian oil producers signal further cuts to come

Pipelines carrying steam to wellheads and heavy oil back to the processing plant line the roads and boreal forest at the Cenovus Energy Christina Lake Steam-Assisted Gravity Drainage (SAGD) project 120 km (74 miles) south of Fort McMurray, Alberta, August 15, 2013.Todd Korol

CALGARY, Alberta (Reuters) - Canadian energy companies, especially those at higher cost oil sands producers, are signaling they will cut capital spending for a second straight year in 2016 as they adjust to a painful new reality of oil near $40 a barrel.

Energy executives, coming off a bleak third-quarter earnings season and due to roll out capital budgets in coming weeks, were in a grim mood even before the United States last week rejected TransCanada Corp's proposed Keystone XL pipeline that would have been key in boosting exports of heavy oil from the landlocked oil sands.

"The initial forecast would be for a reduction (in capital spending) of 10 to 20 percent for next year," said Eric Nuttall, portfolio manager at Sprott Asset Management, which hold about C$55 million ($41.37 million) in energy stocks.

"More companies will be spending within cash flow, that's the discipline being forced onto them by credit markets, equity markets and their banks."

The seven biggest Canadian producers cut 2015 capital spending by 39 percent, or a combined C$12 billion, from last year according to a Conference Board of Canada report.

Of those seven, so far only Cenovus Energy Inc and Canadian Natural Resources Ltd have outlined 2016 budgets.

Cenovus estimates capital spending between C$1.5-C$2.0 billion versus C$1.8-$1.9 billion in 2015. Chief Executive Brian Ferguson said if oil prices hold around $45 a barrel, the company will spend roughly C$1.5 billion in 2016, less in 2017 and keep some oil sands project expansions on hold.

Canadian Natural expects to spend between C$4.5-C$5.0 billion next year, down from 2015's C$5.44 billion.

On Husky Energy Inc's earnings call, CEO Asim Ghosh warned the company is basing planning on U.S. crude at $40 a barrel for the next two years, adding that capital spending will stay "in a similar neighborhood" to this year.

With Canadian energy stocks down nearly 50 percent since oil started sliding in June 2014, investors are keen for cautious budgets.

"Canadian companies really need to be focused on living within their cash flow," said Jennifer Stevenson, vice president at 1832 Asset Management, which manages C$2 billion in energy assets.

Encana Corp on Thursday bucked the trend slightly by speeding up investment in the U.S. Permian shale basin this year, but is using capital originally earmarked for 2016. Executives suggested 2016 spending will be carefully controlled.